Date: 20000720
Docket: A-99-99
OTTAWA, ONTARIO, THE 20TH DAY OF JULY 2000
CORAM: LÉTOURNEAU J.A.
EVANS J.A.
SHARLOW J.A.
BETWEEN:
ITT INDUSTRIES OF CANADA LTD.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
JUDGMENT
This appeal is dismissed with costs.
"Gilles Létourneau"
J.A.
Date: 20000720
Docket: A-99-99
CORAM: LÉTOURNEAU, J.A.
EVANS, J.A.
SHARLOW, J.A.
BETWEEN:
ITT INDUSTRIES OF CANADA LTD.
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, on Thursday, June 29, 2000
Judgment delivered at Ottawa, Ontario, on Thursday, July 20, 2000
REASONS FOR JUDGEMENT: SHARLOW J.A.
CONCURRED IN BY: EVANS J.A.
CONCURRING REASONS FOR JUDGMENT: LÉTOURNEAU J.A.
Date: 20000720
Docket: A-99-99
CORAM: LÉTOURNEAU J.A.
BETWEEN:
ITT INDUSTRIES OF CANADA LTD.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
The issue in this appeal is whether a British Columbia tree farm licence sold by the appellant in 1980 was a "timber resource property" as defined in paragraph 13(21)(d.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 62), as amended by S.C. 1974-75-76, c. 26, subsection 6(7). If the tree farm licence is a timber resource property, any gain the appellant may have realized on the sale is excluded from the definition of "capital gain" and would be taxed as income.
A tree farm licence is an agreement by which the Province of British Columbia grants certain rights to cut timber in a designated area subject to compliance with a number of conditions, including those relating to acceptable forestry practices. The tree farm licence the appellant sold in 1980 was designated "TFL 6". As it was issued as a replacement for another tree farm licence with the same designation, I will refer to it as "Replacement TFL 6."
What was replaced by Replacement TFL 6 was a forest management licence the appellant had acquired in 1961 from another party. That licence had been issued in 1950 under the Forest Act as then in force (the Forest Act, R.S.B.C. 1936, c. 102, as amended in 1948). The forest management licence was an agreement between the Province of British Columbia and the holder of the licence, one of the terms of which read as follows:
| Subject to compliance on the part of the Licensee with the provisions of the "Forest Act" and regulations made thereunder, and the terms and conditions of this licence and the management working plan, the licence is perpetual. This agreement in all respects shall be subject to the "Forest Act". |
By amendments to the Forest Act in 1958, forest management licences became tree farm licences. The appellant's forest management licence was given the designation "TFL 6."
The 1958 Forest Act amendments also provided that a tree farm licence granted after March 19, 1958 would be awarded for a term of 21 years and would include a renewal clause entitling the holder to a new tree farm licence upon expiry of that term. That amendment did not affect the term of TFL 6, because it had been granted before March 19, 1958.
In 1978 the Forest Act was repealed and replaced with a new statute of the same name. The new Forest Act provided for the expiry of all perpetual tree farm licences. The amendments caused TFL 6 to expire on December 31, 1979 but gave the appellant a right to have it replaced, on request, with a tree farm licence for the same area for a 25 year term.
The appellant made such a request on or about May 28, 1979, and on January 1, 1980 the Province issued the replacement tree farm licence. That replacement, Replacement TFL 6, is what the appellant sold later that same year for the gain that is the subject of this appeal.
TFL 6 and Replacement TFL 6 were licences to cut timber. For income tax purposes, they were within the class of property called "timber limits" and thus were, by definition, capital property.
Generally, a gain on the disposition of capital property is taxed at a lower rate than a gain on the disposition of other kinds of property. For certain kinds of timber cutting rights, that changed in 1975 when Parliament amended the Income Tax Act to define a new category of timber cutting right, a "timber resource property".
At the same time, the definition of "capital gain" was amended to exclude any gain from the disposition of a timber resource property. Because of that amendment, a gain from the disposition of a timber resource property is taxed at the rate applicable to ordinary income.
The definition of "timber resource property" reads as follows:
| "timber resource property" of a taxpayer means
| (i) a right or licence to cut or remove timber from a limit or area in Canada (in this paragraph referred to as an "original right") if |
| (A) that original right was acquired by the taxpayer (other than in the manner referred to in subparagraph (ii)) after May 6, 1974, and |
| (B) at the time of the acquisition of the original right |
| (I) the taxpayer may reasonably be regarded as having acquired, directly or indirectly, the right to extend or renew that original right or to acquire another such right or licence in substitution therefor, or |
| (II) in the ordinary course of events, the taxpayer may reasonably expect to be able to extend or renew that original right or to acquire another such right or licence in substitution therefor, or |
| (ii) any right or licence owned by the taxpayer to cut or remove timber from a limit or area in Canada if that right or licence may reasonably be regarded |
| (A) as an extension or renewal of or as one of a series of extensions or renewals of an original right of the taxpayer, or |
| (B) as having been acquired in substitution for or as one of a series of substitutions for an original right or the taxpayer or any renewal or extension thereof. |
|
|
| "avoir forestier" d'un contribuable désigne
| (i) un droit ou un permis de couper ou de retirer du bois sur une concession ou un territoire du Canada (appelé, au présent alinéa, "droit initial") si |
| (A) le contribuable a acquis ce droit initial (mais non de la manière au sous-alinéa (ii)) après le 6 mai 1974, et si, |
| (B) à la date de l'acquisition du droit initial, |
| (I) le contribuable peut raisonnablement être considéré comme ayant acquis, directement ou indirectement, le droit à la prolongation ou au renouvellement de ce droit initial ou le droit d'acquérir un autre droit ou permis de ce genre pour le remplacer, ou |
| (II) dans le cours ordinaire des choses, le contribuable peut raisonnablement s'attendre de pouvoir obtenir la prolongation ou le renouvellement de ce droit initial ou de pouvoir acquérir un autre droit ou permis de ce genre pour le remplacer, ou |
| (ii) tout droit ou permis de couper ou de retirer du bois sur une concession ou un territoire du Canada qui appartient au contribuable si ce droit ou ce permis peut raisonnablement être considéré |
| (A) comme une prolongation ou un renouvellement d'un droit initial ou comme l'une de plusieurs prolongations ou renouvellements d'un tel droit du contribuable, ou |
| (B) comme ayant été acquis en remplacement d'un doit initial ou en remplacement d'un renouvellement ou prolongation de celui-ci ou lors d'un ou de plusieurs remplacements d'un tel droit du contribuable ou renouvellement ou d'une telle prolongation. |
|
|
In filing its income tax returns for 1980, the appellant took the position that it was entitled to treat the gain on the sale of Replacement TFL 6 as a capital gain because the rights disposed of fell outside the definition of "timber resource property." The Crown did not agree, and reassessed the appellant on the basis that the gain was on income account. That reassessment is the subject of an appeal in the Trial Division.
The Crown sought a determination of a question of law under Rule 220(1) on the question of whether Replacement TFL 6 was a "timber resource property". The Motions Judge found that it was. I agree.
Replacement TFL 6 is a right or licence to cut or remove timber from a limit or area in Canada, and thus it is within the opening words of the definition of "timber resource property" in paragraph 13(21)(d.1). But to be a timber resource property it must also be within either subparagraph (i) or (ii): The Queen v. Kettle River Sawmills Ltd. 94 D.T.C. 6086 (leave to appeal refused, [1994] 2 S.C.R., vii). It is common ground that Replacement TFL 6 is not within subparagraph (i). The question, then, is whether it is within subparagraph (ii).
The Crown's position is that any renewal, extension or substitution of a right or licence to cut or remove timber from a limit or area in Canada is automatically a "timber resource property" under subparagraph (ii), if the renewal, extension or substitution occurred after May 6, 1974. The Crown argues that is the case whether the right that was renewed, extended or substituted was granted before or after May 6, 1974 and whether or not it carried a right or expectation of renewal, extension or substitution as described in clause (i)(B).
Under the Crown's interpretation, the definition of "timber resource property" is read as though the words "original right", wherever they appear, are replaced with the words "right or licence to cut or remove timber from a limit or area in Canada." If that is done, subparagraph (ii) of the definition would read as follows:
| "timber resource property" of a taxpayer means |
| (ii) any right or licence owned by the taxpayer to cut or remove timber from a limit or area in Canada if that right or licence may reasonably be regarded |
| (A) as an extension or renewal of or as one of a series of extensions or renewals of a right or licence to cut or remove timber from a limit or area in Canada, or |
| (B) as having been acquired in substitution for or as one of a series of substitutions for a right or licence to cut or remove timber from a limit or area in Canada or any renewal or extension thereof. |
| The appellant relies on an alternative interpretation suggested by obiter dicta in Kettle River, where Hugessen J.A. said that, in determining whether a timber cutting right is an "original right" within subparagraph (ii), the time limitation in subparagraph (i) ("acquired after May 6, 1974") should be ignored but the conditions imposed by clause (i)(B) should be retained. |
The interpretation proposed by the taxpayer accordingly requires the definition of "timber resource property" to be interpreted as though it read as follows:
| "timber resource property" of a taxpayer means |
| (i) a right or licence to cut or remove timber from a limit or area in Canada [...] if |
| (A) that right was acquired by the taxpayer (other than in the manner referred to in subparagraph (ii)) after May 6, 1974, and |
| (B) at the time of the acquisition of that right |
| (I) the taxpayer may reasonably be regarded as having acquired, directly or indirectly, the right to extend or renew that right or to acquire another such right or licence in substitution therefor, or |
| (II) in the ordinary course of events, the taxpayer may reasonably expect to be able to extend or renew that right or to acquire another such right or licence in substitution therefor, or |
| (ii) any right or licence owned by the taxpayer to cut or remove timber from a limit or area in Canada if that right or licence may reasonably be regarded |
| (A) as an extension or renewal of or as one of a series of extensions or renewals of a right referred to in subparagraph (i), or |
| (B) as having been acquired in substitution for or as one of a series of substitutions for a right referred to in subparagraph (i), or any renewal or extension thereof. |
The appellant argues that even if the statement of Hugessen J.A. in Kettle River was obiter because it was not an essential link in the chain of reasoning that led to the result, this Court should not depart from it because of the importance of predictability and consistency in tax matters. Taxpayers faced with a choice of accepting or rejecting a renewal, extension or substitution of a timber cutting right might well have relied on the authority of Kettle River in reaching their decision. Kettle River was decided some years ago, and Parliament has not amended or clarified the definition of "timber resource property".
In my view, the obligation of the Court in this case is to consider whether or not the interpretation suggested by the obiter in Kettle River is correct, and to confirm it only if it is correct. Neither the passage of time since Kettle River was decided, nor the inaction of Parliament in the interim, relieves the Court of that obligation or requires the adoption of obiter that is found not to be correct.
Replacement TFL 6 was acquired in substitution for TFL 6. By the Kettle River interpretation, Replacement TFL 6 would be outside subparagraph (ii) because it was acquired in substitution for a right that did not carry, at the time of acquisition, a right or expectation of renewal, extension or replacement as described in clause (i)(B).
It was said in Kettle River that the definition of "timber resource property" is not a model of clarity. I agree with that. Faced with such ambiguity, it is appropriate to consider the two alternative interpretations against the objective of the legislation. The only material that discloses its objective is the May 6, 1974 Notice of Ways and Means Motion that preceded the enactment of the timber resource property provisions. It reads in part as follows:
| That, where a taxpayer acquires after May 6, 1974, a property that is a timber limit or a right or licence to cut timber from a timber limit or area in Canada, provided that all or any part of the cost may reasonably be regarded as consideration for an expectation of being able to or a right to renew, acquire or apply for a timber limit or a right or licence to cut timber from a timber limit or area in Canada, ... the proceeds of disposition [of such property] ... shall be included in income.... |
The proposal was to have the new timber resource property regime apply to timber cutting rights that carried with them, at the time of acquisition, a right or expectation of renewal, extension or substitution. The obvious intention was that, for tax purposes, any consideration paid for a right or expectation of a renewal, extension or substitution of a timber cutting right would be accounted for as part of the cost of the right, but any gain on the disposition of the right would be taxed as income.
However, this excerpt does not indicate whether or not there was an intention to have the new regime apply to a renewal, extension or substitution of a timber cutting right that did not, at the time of its original acquisition, carry a right or expectation of renewal, extension or substitution. Therefore it does not assist in choosing between the two suggested interpretations.
Neither party suggests that the result of the interpretation propounded by the other is absurd or inconsistent with a tax policy expressed or implied in any other provision of the Income Tax Act. The result of either interpretation is one that Parliament could plausibly have intended. Nor is this a case in which an ambiguous provision should be interpreted to favour the taxpayer. It was acknowledged in argument that either interpretation would favour some taxpayers but not others. In these circumstances, I am compelled to conclude that the Crown's interpretation, being the more straightforward one, is more likely to give effect to the intention of Parliament than the more convoluted interpretation suggested by the Appellant.
For these reasons, I conclude that Replacement TFL 6 is a timber resource property as defined in paragraph 13(21)(d.1). I would dismiss the appeal with costs.
Karen R. Sharlow
J.A.
"I agree
John M. Evans J.A."
Date: 20000720
Docket: A-99-99
CORAM: LÉTOURNEAU, J.A.
EVANS, J.A.
SHARLOW, J.A.
BETWEEN:
ITT INDUSTRIES OF CANADA LTD.
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
I have had the benefit of reading the reasons for judgment written by my colleague, Madam Justice Sharlow, and I agree with them. I simply want to add a few remarks with respect to the interpretation suggested by the appellant.
Paragraph 13(21)(d.1) of the Income Tax Act R.S.C. 1952, c. 148 as thereafter amended (Act) was enacted by S.C. 1974-75-76, c-26 ss. 6(7) and reads:
| (d.1) "timber resource property" of a taxpayer means |
| (i) a right or licence to cut or remove timber from a limit or area in Canada (in this paragraph referred to as an "original right") if |
| (A) that original right was acquired by the taxpayer (other than in the manner referred to in subparagraph (ii)) after May 6, 1974, and |
| (B) at the time of the acquisition of the original right |
| (I) the taxpayer may reasonably be regarded as having acquired, directly or indirectly, the right to extend or renew that original right or to acquire another such right or licence in substitution therefor, or |
| (II) in the ordinary course of events, the taxpayer may reasonably expect to be able to extend or renew that original right or to acquire another such right or licence in substitution therefor, or |
| (ii) any right or licence owned by the taxpayer to cut or remove timber from a limit or area in Canada if that right or licence may reasonably be regarded |
| (A) as an extension or renewal of or as one of a series of extensions or renewals of an original right of the taxpayer, or |
| (B) as having been acquired in substitution for or as one of a series of substitutions for an original right of the taxpayer or any renewal or extension thereof; |
It is obvious to me that subclauses A, B(I) and B(II) do not serve to define or further define the term "original right" found in subparagraph (i) as contended by the appellant. These subclauses instead show under what conditions an original right will be a "timber resource property". These subclauses are in fact part of the definition of "timber resource property" which, in my view, is the only term defined in paragraph 13(21)(d .1). The use of the words "original right" in subparagraph (i) is for sheer convenience in order to avoid a repetition, in that paragraph, of the long-winded words "a right or licence to cut or remove timber from a limit or area in Canada". This is made clear by the express mention that this right is to be "referred to as an "original right"". The text does not speak in terms of definition of the right, but rather in terms of a shorter designation of that right which is, it bears repeating, a right or licence to cut or remove timber from a limit or area in Canada.
Paragraph 13(21)(d.1) rewritten in abbreviated form reads:
| "timber resource property" means |
| (i) an "original right" if |
This abbreviated form illustrates that the conditions in subparagraph (i) form part of the definition of timber resource property and not of original right.
In my view, this is sufficient to dispose of the appellant"s appeal which is grounded on a misconstruction and misapprehension of the term "original right".
I also agree with the respondent that the definition of "timber resource property" found in paragraph 13(21)(d .1) envisages two different scenarios. The first scenario is contained in subparagraph 13(21)(d.1)(i) and aims at an original right to cut timber that was acquired after May 6, 1974 at the conditions therein mentioned. The second scenario found in subparagraph 13(21)(d.1)(ii) contains its own separate and specific conditions and is not limited, as in the first scenario, to rights acquired after May 6, 1974. It would also apply to rights obtained before that date if those rights are eventually extended, renewed or substituted under the conditions expressed in subparagraph (ii). As was pointed out by the Motions Judge, this was precisely the situation in Kettle River Sawmills Ltd. et al. v. The Queen, 94 D.T.C. 6086 (F.C.A.) where a pre-May 6, 1974 right was renewed after May 6, 1974 and was held to be the subject of an acquisition within the meaning of subparagraph (ii), thereby showing a purpose distinct from subparagraph (i) which applied to rights not caught by the latter. That the two scenarios are different and mutually exclusive is also shown by the express mention in subparagraph (i) that the original right must have been acquired in a manner different from the manner referred to in subparagraph (ii).
In my view, it would be contrary to principles of interpretation to import, as the appellant suggests, the conditions of subparagraph (i) into subparagraph (ii) and either add or substitute them to those that are required in that subparagraph. The interpretation given by the Motions Judge to paragraph 13(21)(d.1) complies with the meaning of the definition therein contained. Not only is it reasonable, but, contrary to the one proposed by the appellant, it does no violence to the text. I am satisfied that the learned Motions Judge, in her well-reasoned decision, came to the right conclusion as regards the interpretation of that paragraph.
For these reasons, I would dismiss the appeal with costs.
"Gilles Létourneau"
J.A.
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
| STYLE OF CAUSE: ITT INDUSTRIES OF CANADA LTD. |
Appellant
Respondent
DATE OF HEARING: THURSDAY, JUNE 29, 2000
PLACE OF HEARING: TORONTO, ONTARIO
| REASONS FOR JUDGMENT: SHARLOW J.A. |
| CONCURRED IN BY: EVANS J.A. |
CONCURRING REASONS
| FOR JUDGMENT BY: LÉTOURNEAU J.A. |
| DATED: THURSDAY, JULY 20, 2000 |
APPEARANCES: Mr. Brian Carr
Mr. David E. Spiro
| SOLICITORS OF RECORD: Davies, Ward & Beck |
Barristers & Solicitors
1 First Canadian Place, 44th Floor
| P.O. Box 53, Station 1st Can. Place |
Toronto, Ontario
M5X 1B1
| Deputy Attorney General of Canada |
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